Wednesday, November 22, 2006

You have to get up pretty early in the morning to beat Mark Thoma to the blog. He's already got links, excerpts, and commentary on the recent White House and Treasury officials statements on Social Security. The first key story is by Lori Montgomery in The Washington Post, in which Treasury Secretary Paulson discusses how there are "no preconditions" on this round of Social Security reform discussions and OMB Director Portman says that the President wants to listen.

It also means that the White House is willing to listen to other ideas, administration officials said, including personal savings accounts that do not involve diverting Social Security taxes, as well higher payroll taxes to help cover a projected explosion in Social Security costs after members of the baby boom generation begin to retire in 2008.

"We're in a listening mode," said Rob Portman, director of the Office of Management and Budget, who has also been spending a lot of time since the election talking to key Democrats about entitlements. "The president wants to listen. He wants to hear what the leaders on Capitol Hill think is the best way to go. He's not wed to any particular approach."

The other story is by Jackie Calmes in The Wall Street Journal, in which Chief of Staff Josh Bolten's public statements are also being scrutinized:

Some listeners wondered whether Mr. Paulson was signaling administration willingness to quit prescribing the accounts. Administration officials privately said that wasn't the case. Still, a Treasury official said Mr. Paulson wants to approach the issue with an open mind and will suggest to lawmakers, "Why don't we start talking and see where we go, as opposed to prescribing things right away?"

Chief of Staff Bolten got a similar query about private accounts when he spoke last week before more than 100 people at a dinner of the board of the Brookings Institution, a policy think-tank. According to one attendee, Mr. Bolten "came as close as he could in a quasi-public setting to saying that carve-out accounts could be dropped if that were the price of reform." A second audience member supported that interpretation.

Paulson, Portman, and Bolten are the three Administration heavyweights on this--they all understand the issues involved. This is a very good sign.

Mark concludes his post as follows:

As far as I can tell, there's nothing new here. The administration is hoping that by giving in on other issues, it can get private accounts into place, but private accounts will not be dropped as part of any compromise. So long as that's the case, this is nothing but a waste of time, time that could be spent on much bigger problems such as reforming health care.

Here's what's new. The President used to go around the country making speeches of the form, "Social Security is in financial trouble. We need voluntary personal accounts." The speeches made no sense, as many people (like Mark) rightly pointed out. There is no connection between restoring solvency and voluntary personal accounts. (See this earlier post for a more extensive discussion.) The two themes of the speech did not connect.

The President's Commission did give him a plan that restored solvency and had voluntary personal accounts. The restoration of solvency came from gradual (and necessarily steep) reductions in benefits payable from the pay-as-you-go system. He couldn't sell it (or its variants, like progressive price indexing, another rhetorical nightmare) to the weak majorities in his own party that controlled the Congress.

Okay, it's a new day, with new leadership in Congress. The Administration cannot now presume to dictate the terms of the debate. The Administration essentially has to win one key point about the goals of the debate: that the standard for reform should be that under current projections, the final product achieve "sustainable solvency" for the system: a positive and rising Trust Fund balance at the end of the projection period. (See this earlier post for the grueling details.) Nothing short of that should be acceptable, because something short of that would require that the issue be revisited again, even if current projections are borne out (or exceeded).

If the Administration is going to adhere to this goal--and arguments against it will look pretty weak--then it can sit back and wait for personal accounts to be the outcome of the compromise, not a condition of the discussion. It's simple. If you are going to restore sustainable solvency, and you are not going to do it solely by reducing projected benefits, then you are going to need plenty of additional money to do it (note the statements about being willing to raise the cap on taxable earnings). Either the money goes in the Trust Fund or it goes into personal accounts. The former is too unreliable as a store of value (see this post). So you get personal accounts--not voluntary personal accounts unrelated to solvency, but mandatory accounts that facilitate the prefunding of future obligations that is essential to restore solvency without substantially lowering replacement rates.

The message to Democrats is as follows: go find a plan that achieves sustainable solvency without personal accounts and then we can talk. There is basically one plan that has been put forward that does it--Diamond and Orszag. There are plenty of ways to do it without personal accounts (see my early thoughts on it, or just take the Commission Model 2 and get rid of the personal account options).

The problem with these two starting points for political debate is that Diamond and Orszag rely too much on revenue infusions without cutting expenditures enough and the alternatives rely too much on expenditure cuts without raising much additional revenue. Other plans that are more centrist in their approach may be appealing. I suggest that they all start here.

7 comments:

"The message to Democrats is as follows: go find a plan that achieves sustainable solvency without personal accounts and then we can talk. There is basically one plan that has been put forward that does it--Diamond and Orszag."

Sen Robert Bennett had a plan that was scored in the spring by SSA (http://www.ssa.gov/OACT/solvency/RBennett_20060316.pdf) and by CBO (http://www.cbo.gov/ftpdocs/71xx/doc7127/04-05-BennettLetter.pdf). It depends mostly on benefit reductions (progressive price indexing and indexing benefits to longevity) but also has transfers from the general fund, which could be interpreted as revenue increases, depending on your political economy. Under the CBO score, no transfers would be needed.

To Max: There are good arguments against targeting sustainable solvency. Yours isn't one of them. (Sorry to attack anonymously, but us civil servants aren't supposed to have opinions.) As a Platonic ruler, it's obvious that we want to target sustainable policy in order to minimize future policy changes. Here are two better arguments: 1)Future generations are going to be richer than current ones. We should muddle through and minimize the burden on current generations and let our filthy rich grandchildren forgo their 72nd generation Ipods. 2) The perfect is the enemy of the good. If we can make a little progress, let's take it.

The dishonesty in this discussion is introduced by people who insist that Social Security's financial condition can be fully characterized by its 75-year actuarial balance. That would be adequate if the annual balances showed no trend, but they obviously do. So I enter the debate insisting that the later period of large annual deficits not be ignored.

I am not knowledgable about this topic, but I have heard enough to ask this question, and I am truly asking for an answer.

As I understand it right now, part of the problem with Social Security insolvency is that Congress goes in and TAKES larges chunks of SS money and uses it for something else. Am I correct in this understanding?

If so, (and I do NOT understand how this is possible, or why we allow it even if it is legal), what would we gain in terms of solvency if we STOPPED this theft?

Your understanding is pretty good. In about a decade, the program will start to pay out more in benefits than it collects in taxes each year. Those annual deficits will continue to grow over time. That's the source of the insolvency.

Until that time, the Social Security system will collect more in taxes than it pays out in benefits, as it has for several years in the past.

When Social Security runs these surpluses, the government should use the money to buy back debt that it has previously issued to the public, moving this debt into the Social Security trust funds. It does not do this. What it does is to issue itself a new Treasury bond, keeping the money, and spending it on all the things in the federal budget.

This is not a problem for the solvency of Social Security on paper--the Treasury bonds in the trust fund will be redeemed. It is a problem for future generations of taxpayers, who will have to come up with the funds to meet those redemptions *while still servicing the federal debt held by the public.*

I agree with you--the government should switch to a more honest budget system, in which it explicitly announces a target for the ratio of the total debt (i.e., including the trust funds) to GDP or a target for the amount of the on-budget (i.e., excluding Social Security surpluses) budget over a complete business cycle.

I hope this helps. You can read the archived posts on Social Security to learn more about its interaction with the federal budget.

About Me

I am a Professor of Economics and the Director of the Nelson A. Rockefeller Center at Dartmouth College. I am on the board of Ledyard Financial Group (LFGP) and currently serve on the Census Scientific Advisory Committee. I blog about economics, politics, and current events at http://samwick.blogspot.com. The opinions expressed here, there, and everywhere do not necessarily reflect the views of Dartmouth College or any other institution with which I am affiliated.

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